A panel of three judges Wednesday rejected Scranton's petition for a 1 percent wage tax on the nearly 23,000 nonresidents who work in the city but live elsewhere.

The city may make up the resulting budget shortfall next year by borrowing more next year than had been anticipated or selling an unspecified city asset, Mayor Chris Doherty said.

In their 50-page ruling, Lackawanna County Judges Terrence Nealon and Robert Mazzoni and visiting Pike County Judge Harold Thomson stated the city failed to prove its case for a 1 percent earned income tax on the 22,655 nonresidents working in the city.

The city failed to pass a required hurdle of having "substantially implemented" a revised recovery plan, by failing to fulfill two revenue generators in that plan. Those included failing to obtain a commitment from a lender for a lease-back borrowing measure to be undertaken next year; and failing to obtain commitments from nonprofit entities for significantly increased donations, according to the ruling.

Furthermore, even if the city had substantially implemented a recovery plan, the city's commuter tax petition would have been denied because it would have gone beyond a legal threshold of balancing the 2013 budget by generating a surplus, the judges said.

City officials have not determined whether to appeal and now will review that question and ways to plug the resulting $2.5 million budget hole from not having a commuter tax next year, Mr. Doherty said. He also said it is too early to say whether the city would try again next year for a commuter tax.

"The administration, council, Pennsylvania Economy League (the city's Act 47 recovery coordinator) and attorneys will review the decision and then make the appropriate decision of how to address 2013," Mr. Doherty said.

The budget shortfall may be made up next year either by tacking $2.5 million onto an anticipated leaseback borrowing package, or through the sale of an unspecified city asset, Mr. Doherty said. He declined to be more specific about which asset could possibly be sold.

"You deal with the decision and move on," the mayor said.

Of the 36,651 people who work in the city, 13,996 are city residents and 22,655 are nonresidents who would have been subject to the commuter tax.

Commuter-tax opponents were pleased with the ruling.

"The court concluded, which was part of our position as well, that the only reason to ask for a commuter tax was to bring the budget into balance and not to create a surplus," said attorney Armand Olivetti, who represented the opponents. "I think the local court wrote a good solid opinion that should hold up on appeal," if there is one.

A 1 percent commuter tax in each of the next three years was one of the key alternatives to property tax hikes on city residents in the city's revised Act 47 recovery plan adopted in August. The city would need court approval for a commuter tax each year that it may exist.

To gain court approval, the city had to pass a three-pronged test legislated in 1996 by then-Rep. Frank Serafini to ensure the city has done all it could to balance its budget before tapping commuters.

As such, the case centered on whether the city met the Serafini hurdles, which include: having substantially implemented parts of a recovery plan, including raising taxes and fees on city residents; taking steps to gain required approval from other groups such as courts, voters or unions; and demonstrating that additional city tax revenue from such steps isn't enough to balance the city's budget.

While the city did achieve several goals of the recovery plan, including raising some taxes and fees on residents, it failed to secure commitments for a leaseback and nonprofit donations, and never replaced those nonexistent revenues to help balance the 2013 budget as PEL had required, the judges said.

Regarding a leaseback, the city had not identified a property to lease, Councilman Frank Joyce testified the city had no fallback plan if a leaseback failed, and PEL Executive Director Gerald Cross testified it's possible a leaseback borrowing may never occur, according to the decision.

The panel of judges also determined that the Serafini requirement of having implemented a recovery plan meant just that - that it had already occurred - and not that it would occur in the present or future; and that a commuter tax could only be a last resort.

"The clear legislative intent of the so-called 'Serafini legislation' is to permit an increase in the commuter tax as a final recourse and for the sole purpose of balancing the municipal budget," and not to build a surplus, the ruling states.

The city also has not increased the annual $178 garbage fee in 10 years and is keeping it the same next year, although PEL had recommended an increase to a $225 garbage fee, the decision states.

Opponents argued that the city's revenue figures in its recovery plan and 2013 budget were unreliable and the court agreed.

For example, the city annually retains more than $500,000 in earned-income taxes on nonresident commuters whose hometowns don't have an EIT, but the city "inexplicably" did not receive any of this tax in 2010, the judges said. The city has had discussions with the Scranton Single Tax Office about this matter and is awaiting a response regarding the "missing 2010 tax receipts," the ruling states.

The panel of judges concluded the city could have closed the commuter-tax gap in other ways, such as by a "marginal" increase on city residents of the current earned-income tax of 2.4 percent to 2.5 percent, which would raise $915,000; increasing the garbage fee to $225 a year; and collecting the $500,000 apparently owed to the city from the Single Tax Office.

The city's commuter-tax revenue estimate also changed during the court proceedings that took place on Dec. 11, 12 and Friday. The petition initially estimated that a 1 percent commuter tax would generate $4 million a year in the latter two years, but only $2.5 million in the first year due to a lag in obtaining full collections.

However, asked by the judges to back up that estimate with actual numbers of how much EIT is processed by the city, the city's witnesses on Friday testified to a revised estimate that a commuter tax would raise around $4 million next year and $6.7 million in 2014-15, again with the difference attributed to a start-up lag.

"I think the court was reluctant to impose a $6.7 million tax burden on 23,000 people on basis of 'ifs' and 'buts,'" Mr. Olivetti said.

Alexander Chelik, mayor of Mayfield, founder of the anti-tax civic group Scranton Taxing Our People and who testified in the proceeding on behalf the Lackawanna County Association of Boroughs, said of the ruling, "I think it was a just decision, but it's not over by any means. We have to prepare for an appeal on next year's petition and we have to continue to raise money to fight it."

Contact the writer: jlockwood@timesshamrock.com

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